Saturday, December 11, 2010

Analysis: EU Biofuels Squeezed By Green Doubts, Tight Budgets

Date:10-Dec-10Country: UKAuthor: Nigel Hunt The European Union's biofuels industry looks set to struggle to attract funds to expand with a challenging investment climate made more difficult by complex questions about the sector's environmental credentials.The eurozone's economic crisis is taking a toll as biofuels producers face an uphill task as they seek to secure financial incentives as government budgets are increasingly squeezed.

In Germany, the coalition government elected in late 2009 initially said it would revive the biofuels industry. But it later froze biofuels taxes rather than reducing them and scaled back planned increases in blending levels.

"Currently the outlook for the biodiesel industry is pretty hopeless unless there is a correction in the tax level," said Peter Schrum, president of Germany's biofuels industry association BBK.

Biofuels, which are currently mainly produced from grains, vegetable oils and sugar crops, are seen by advocates as a way of reducing emissions of the greenhouse gases which contribute to climate change.

The European Union initially embraced biofuels, setting a target that 10 percent of all fuels used in transportation should come from renewable sources by 2020. Biofuels are by far the most important source of renewable motor fuel.

The industry's environmental credentials have, however, been questioned with the development of a concept known as "indirect land use change" (ILUC) which suggests that some biofuels may actually lead to an increase in climate-warming emissions.

BURNING FORESTSThe EU's executive Commission has responded by running 15 studies on the new concept which centers on concerns that the expansion of biofuels may indirectly lead to the burning of forests to clear additional land.

This could lead to a one-off release of millions of tonnes of carbon and lead environmental campaigners and many politicians to seek some kind of disincentive applied to biofuels from food crops to reflect that impact.

EU sources says a Commission strategy report due by the end of this year will contain no concrete actions. Instead it will propose further, detailed impact assessments by July 2011, and just possibly a proposal for new legislation after that.

Any such proposal would then take at least a year to become law."If you are going into a difficult money market and there is some dodginess about the regulatory environment then they (potential investors) will say no. It is as simple as that," said Clare Wenner of the UK's Renewable Energy Association.

"They will not invest in a climate of dither," Wenner, the REA's head of renewable transport, said.

Alwyn Hughes, chief executive of UK biofuels firm Ensus, has said a clear policy framework which favored biofuels that provided the greatest environmental benefits was needed.

The (biofuels) industry is being held back by a lack of robust discrimination between what is good and what is bad," Hughes told Reuters in an interview last month.

SUSTAINABILITY RULESGermany led the way in providing tax incentives for a massive early expansion of its biodiesel industry.

BBK's Schrum said it is now running at only about half of its capacity."Whilst such a major uncertainty exists for current and future biofuels...it is not reasonable to expect real investment to occur," said bioenergy expert Jeremy Woods of Imperial College, London.

In France, new rules on sustainability for biofuels are due to come into force on January 1 although in Britain a similar scheme, mandated by the EU's Renewable Energy Directive, has been delayed while ILUC studies are conducted.

Stricter environmental requirements could dent profitability in the short term but could help to guarantee a future for the industry at a time when biofuels are hotly contested by some green groups.

"We hope that these sustainability criteria will quieten criticisms of biofuels at least for some time," said Georges Vermeersch, head of biodiesel makers group Esterifrance.

The United States and Brazil are the two most important producers of biofuels with output in both countries dominated by petroleum substitute ethanol. The EU ranks third and is the biggest source of diesel substitute biodiesel.